Q2 2023 Marathon Oil Corp Earnings Call
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I would now like to turn the conference over to Guy Baber, Vice President of Investor Relations. Please go ahead.
Thank you Danielle and thank you everyone for joining us on the call. This morning.
Yesterday after the close we issued a press release, a slide presentation and Investor packet that address our second quarter 2023 results. Those documents can be found on our website at marathon oil dot com.
Joining me on today's call are Lee Zimmerman, our chairman President and CEO , Dane Whitehead executive VP and CFO , Pat Wagner Executive VP of corporate development strategy, and Mike Henderson Executive VP of operations. As a reminder, today's call will contain forward looking statements subject to risks and uncertainties that could cause app.
Actual results to differ materially from those expressed or implied by such statements.
For everyone to the cautionary language included in the press release and presentation materials as well as the risk factors described in our SEC filings.
We will also reference certain non-GAAP terms in todays discussion, which had been reconciled and defined in our earnings materials.
So with that I'll turn the call over to Lee and the rest of the team who will provide prepared remarks today. After the completion of these remarks, we'll move to a question and answer session.
<unk>.
Thank you Guy and good morning to everyone listening to our call today.
First I want to again kick off our call by expressing my thanks to our employees and contractors for another quarter, a comprehensive execution against our framework for success.
We don't take such delivery for granted and I'm, especially grateful for your commitment to safety and environmental Excellence. In addition to delivering on all of our operational and financial objectives.
Well done on another great quarter, while staying true to our core values.
There are a few takeaways I want to leave you all with this morning first we delivered another very strong quarter on all fronts highlighted by sequential increases to our cash flow from operations free cash flow and our total company oil and oil equivalent production.
We delivered around $530 million of free cash flow during the second quarter with a significant increase from first quarter, driven by strong execution and improving production trend and a catch up in EEG cash distributions.
Second key takeaway.
We continue to lead our peer group in the broader S&P 500, and returning capital to our shareholders.
The second quarter, we returned $434 million to shareholders, including $372 million of share repurchases.
For the first half of 2023, we've returned over $830 million to our shareholders, representing 40% of our topline cash flow from operations consistent with our framework.
Our differentiated cash flow driven return on capital framework continues to prioritize our shareholders as the first call on our cash flow not the drill bit and not inflation.
First half 2023 return of capital represents a double digit total shareholder distribution yield on an annualized basis and the highest in our E&P peer space.
Our commitment and consistency and returning significant capital is contributing to pure leading growth in our per share metrics.
We've now reduced our outstanding share count by 24% in just the last seven quarters and we are on track to deliver 30% year over year production growth per share.
Our third and final key takeaway this morning.
Our forward outlook remains compelling and differentiated.
We are on track to deliver at 2023 business plan that benchmarks at the top of our high quality E&P peer group on the metrics that matter most shareholder distributions free cash flow generation reinvestment rate capital efficiency free cash flow breakeven and production growth per share.
Our business plan remains on track with operational and financial momentum improving over the second half of the year more.
More specifically.
Our first half weighted capital spending and completion activity will drive our third quarter total company oil and oil equivalent production to at or above the high end of our annual guidance range.
With both higher production and lower Capex over the second half of 2023, we expect continued sequential improvement to our underlying free cash flow generation across the third and fourth quarters.
And finally, though our annual production guidance ranges remain unchanged, our full year oil equivalent production is trending above the midpoint of that guidance.
Looking ahead to 2024, while it's too early to share any specific guidance rest assured that our framework for success and core priorities will remain unchanged our case to be it will be another year of maintenance level of oil production that maximizes, our sustainable free cash flow and prioritizes shareholder distributions and <unk>.
Share growth.
My expectation is that we will once again lead the peer group on the metrics that matter most in 2024.
Benefiting from any deflation that might present itself in the market as well as from the added tailwind of a significant financial uplift in EG from our increased exposure to the global LNG market.
With that I'll turn it over to Dave who will provide a brief financial update thank.
Thank you Lee and good morning, everyone.
As we mentioned second quarter was a tremendous financial quarter for us because we generated $531 million adjusted free cash flow and returned $434 million of capital back to shareholders. That's a 10% increase in shareholder distributions relative to the first quarter importantly, we.
Expect our financial delivery to improve even further over the second half of the year.
On a price normalized basis, we expect our free cash flow generation to improve across the third and fourth quarters relative to the second quarter's already meeting level, driven by higher expected production and lower capital spending.
And with the phasing of our 2023 program.
Returning significant capital back to our shareholders remains foundational to our value proposition in the marketplace. We're focused on building a long term track record of consistent shareholder returns through the cycle that can be measured in years, not just quarters in the first half of 2023 represents another successful step in that journey.
Maybe the first two quarters of the year.
We returned over $830 million to shareholders, representing 40% of our just CFO .
First half return on capital translates to a double digit shareholder distribution yield on an annualized basis and that's the highest in our peer group.
Over the trailing seven quarters, we've now returned approximately $4 $6 billion back for shareholders. That's almost 30% of our current market capitalization that we have returned at less than two years.
We repurchased $4 2 billion.
Of our stock at attractive levels, driving a 24% reduction in our outstanding share count contributing to pure leading growth in our per share metrics remain confident our cash flow driven return of capital framework is uniquely advantaged versus peers.
Hiding investors with first call on cash flow and offering them a differentiated shareholder return profile.
Our framework is sector, leading and transparent providing clear visibility to one of the strongest shareholder distribution yields and the entire S&P 500.
For the full year, we expect to continue to deliver against our framework returning a minimum of 40% of our top line of CFO to shareholders.
We're committed to the powerful combination of a competitive and sustainable base dividend and material share repurchases following launch.
Our base dividend unchanged this quarter keep in mind that we've raised it.
The last 11 quarters, and we're well positioned for another dividend raise later this year with the increase expected to be funded fully funded by the share count reduction from our buyback program. This is consistent with our focus on sustainability and our objective to maintain more of a lowest post dividend free cash.
Low breakeven in the peer space.
We have ample capacity to continue buying back a significant amount of our stock with $1 $8 billion of share repurchase authorization outstanding.
Our plan is to maintain our return on capital leadership and improve our already investment grade balance sheet through gross debt reduction we can do both and that's exactly what we're demonstrating we paid down $200 million of high coupon U S. U S ex debt so far this year and remarketed $200 million.
Tax exempt bonds and a favorable interest rate.
The strength and durability of our shareholder return and balance sheet enhancement initiatives are underpinned by the quality of our assets our disciplined capital allocation framework, our peer leading capital efficiency and our strong free cash flow generation.
This is proven out by our leadership position when it comes to the most important metrics for our sector for full year 2023, we expect to deliver the best free cash flow yield and the high quality E&P space, the lowest reinvestment rates and among the best capital efficiency, all while maintaining the lowest enterprise free cash flow breakeven.
On a pre and post dividend basis.
With that summary, I will turn it over to Mike to provide a brief update of our 2023 execution is delivering sector leading to outcomes.
Thanks, Deane my key message today is that the priorities for our capital program remains unchanged and that we remain fully on track to deliver on our key commitments to the market, including our annual capital spending and production guidance.
Starting with our capital program, we spent just over 60% of our full year budget. During the first half of the year fully consistent with our stated business plan.
We expect third quarter capital spending to be in the $400 million to $450 million range with a further moderation expected in the fourth quarter.
And are well positioned to take advantage of any deflationary tailwind in the second half of the year.
For the full year 2023.
Our annual capital guidance remains a reasonable assumption for your models.
In terms of the service cost environment first half 2023 pricing was very consistent with our expectation entering the year we.
We're starting to see a general <unk> cost during the second quarter amid improved access to services and equipment.
So the macro environment remains dynamic.
We've now started to see an improved pricing trend across raw materials in most service lines and equipment.
<unk> with a lower level of industry wide drilling and completion activity.
We will look to capture better pricing, where we can with balance of the year, while continuing to protect our execution excellence. We are also seeing a number of positive trends.
To that point year to date field level execution has been very strong on efficiency performance is tracking to the higher end of our annual sales guidance and the Eagle Ford Bakken and Permian.
While this was one of them too.
Full year 2023 capital or production it shouldnt, Hans our production momentum into 2024.
But we also believe there will be more opportunity to capture deflation in the market.
Turning to production.
Phasing of our capital program.
A strong production momentum and to a strengthening commodity price environment.
Our third quarter, specifically, we expect total company oil and oil equivalent production to be up or above the high end of our annual guidance range before a modest sequential decline into the fourth quarter.
Our full year 2023, we've reiterated our production guidance ranges, although we are trending above the midpoint of guidance on an oil equivalent basis.
The combination of higher production and lower capital spending over the second half of the year is expected to drive even further improvement to our underlying free cash flow profile.
Turning briefly to our integrated gas business in EG after receiving a substantial catch up cash distribution during second quarter, we expect the relationship between earnings and cash distributions to normalize over the second half of the year.
Third quarter distributions should be somewhat evenly split between dividends and return capital.
Looking a bit further ahead to 2024, we continue to expect to realize significant financial uplift in EG.
A bank or an increase in our global LNG price exposure.
We're right on track with all of the necessary contractual milestones and beginning January 2020 for Alba sourced LNG will no longer be sold at a Henry hub linkage. It will be sold into the global LNG market. This arbitrage between Henry hub and global LNG pricing coupled with the <unk>.
Highly competitive market for LNG cargoes from a reliable suppliers is expected to drive significant financial uplift for our company at current forwards charged pricing.
Take further advantage of these new commercial terms, we are actively assessing up to a two well infill drilling program at all by targeting high confidence low execution risk shorter cycle opportunities that should mitigate base decline and maximize equity molecules.
Through the LNG plant under the more global LNG linked pricing.
These opportunities are expected to compete with the risk based returns generated from our U S resource plays.
Any infill capital spending is unlikely to make significant endpoint on our overall 2024 capital program.
Yet, it's not just about capturing near term commercial uplift in EG.
As we've stated before and consistent with the recently executed HOA with EG government and our partners Chevron, we're equally focused on the longer term outlook to be in the gas Mega hub concept.
Truly leveraging our unique world class infrastructure and one of the most gas prone areas of West Africa, we expect to extend the life of EG LNG well into the next decade, and further and further enhance our multi year free cash flow capacity.
The next phases of development will include the same gaskamp slowdown as well as potential cross border opportunities.
With that I will turn it over to week, who will wrap up our prepared remarks.
Thank you Mike for years now I have reiterated that for our company in our sector to attract increased investor sponsorship, we must deliver financial performance competitive with other investment alternatives in the market as measured by corporate returns free cash flow generation and return of capital.
More S&P less E&P.
We've delivered exactly that type of performance over the last two years and not just competitive but at the very top.
Our one line investment thesis is this.
<unk> tier sustainable free cash flow generation with an advantaged return of capital profile and sector, leading per share growth all underpinned by an investment grade balance sheet.
Our 2023, we're well positioned to again lead both our peer group and the S&P 500, the metrics that matter most.
Yes, it is pure leading financial and operational delivery is not a one year phenomenon.
It's a continuation of a multiyear trend.
It's sustainable and looking ahead to 2024 I don't expect anything to change my confidence is underpinned by our high quality and oil weighted U S unconventional portfolio that complemented by our unique fully integrated global LNG business in EG.
To close I want to reiterate how proud I am of the way we positioned our company.
We are a results driven but it is also about how we deliver those results staying true to our core values and responsibly delivering the oil and gas the world needs.
And the world needs more energy not less the energy transition is really an energy expansion.
In oil and gas is uniquely positioned to drive global economic progress defend U S energy security.
<unk> out of energy poverty and protect the standard of living we have all come to enjoy.
With that we can open the lineup for Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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Please limit yourself to one question and one follow up.
The first question comes from Arun Jairam of Jpmorgan. Please go ahead.
Good morning, Lee and Dane and Mike.
You mentioned, how your free cash flow should inflect in the second half of this year just given the go $450 million decline in Capex.
Higher.
At oil prices.
I wanted to get your thoughts on how you balance cash return in the second half between equity holders debt reduction.
And perhaps building up the cash balance that you have been.
Operating around $200 million in cash for this year, so just thoughts on balancing those three items.
Yes sure. Thanks.
Yes, the cash return.
Conversation is so central to the <unk>.
Value proposition for shareholders I might take a little longer than you anticipated cover this but just to be thorough.
We've really been.
Steady executing our return of capital framework.
Calls for a minimum 40%.
Operating cash flow in the form of either share repurchases or a base dividend obviously, our track record of meeting that minimum return it's very solid.
Unwavering and we expect that continue that going forward, we return exactly 40% in the first half.
2023, CFO to shareholders, that's $700 million in share repurchases, plus $125 million based dividend, which equated to a 11% annualized distribution yield to truly at the top of the class.
In terms of return on top of that we also paid off $200 million.
<unk> plus percent coupon U S debt.
And kind of balancing those share with share repurchases and returns for investors with debt reduction is something that will be a feature for us going forward.
We certainly continue to see share repurchases as the preferred return vehicle for the lion's share of our shareholder returns.
Our stock's trading at a free cash flow yield in the mid teens. So.
<unk> has continued to be very value accretive real efficient way to drive per share growth and there are synergistic with growing our base dividend as I referenced in my prepared comments, we have $1 8 billion of repurchase authorization outstanding So plenty of running room there.
And the per share growth that we're driving 24% since fourth quarter of 2021, when we restarted this program was pretty pretty eye watering. So for the balance of the year expect us to continue to return 40% of operating cash flow and look to pay down additional debt.
Make no mistake, the 40% return to shareholders is the top priority.
Our second priority will be to continue to start to pay down the term loan that we took out when we acquired the enzyme Eagle Ford asset.
We have a very significant cash flow inflection that we started to free cash flow inflection that we started to realize in the second quarter, but we expect that to continue in the third and the fourth quarter and even on a price normalized basis, we're going to have a lot more flexibility than we've had over the past couple of quarters to serve both of those needs shareholder returns and debt reduction.
<unk> with the tail tailwind, we're seeing and commodity prices, particularly at <unk> right now that's going to provide even more flexibility. We can we can go bigger on share repurchases that we can go faster on debt reduction or some more likely some combination of those.
You asked about <unk>.
Cash balance.
We're operating around $200 million right now.
<unk>.
In the in the course of a month, we actually May go negative at need to borrow on our credit facility a little bit waiting for the big 20.
Of the month check for oil receipts, which is that's the big time, when a big wave of cash flow comes into the company that working capital that we're managing the mechanics of that we actually just established a commercial paper program, which is very cost effective compared to the credit facility and so I think we're comfortable with that over time, we may buildup.
Cash, but it's not a priority for US right now right now its going to be hit the 40% exceeded where we can and take.
Take down that term loan to get that interest expense out of the system.
That's helpful. My follow up maybe it's for Mike.
Maybe a two parter, Mike your updated <unk> guidance.
Is about 17 til is higher $2 30 versus $2 13.
Is that impacting any.
Production from from the higher till those a question from the buy side and then maybe.
To see if you could describe.
The positive variance of the Eagle Ford this quarter, and maybe a little bit light in the in the northern Delaware a couple of those variances in <unk>.
Yeah.
Yes, just just looking at.
The wells to sales cadence.
Let me start with <unk> capital program is very much.
Tracking as planned so kind of we fully expected to execute not.
Kind of fairly.
Generally fairly typical for us to be more front end loaded.
We are we are seeing some outperformance from.
From an execution perspective, particularly in the drilling space.
I look in Bakken I think we've done a record, Florida second, Florida from a drilling perspective.
<unk> story.
Permian or eight.
Year to date, we tried our best ever drilling performance similar story in the completion space.
And then Ben in Eagle Ford.
Sure.
Again, a similar story there I think what's encouraging is Eagle Ford.
With the <unk> acreage.
Since we've got in there, we're probably drilling our wells with 10% faster than what.
They were drilling them last year. So when you kind of combine all of that together, it's putting a little bit of pressure on.
The wells to sales in the year, but I think how I think about it that that pressure is going to really translate more so in the fourth quarter. So if you think about it we're probably pulling a few wells in from the first quarter and for the fourth quarter. So from a capital on production perspective, not going to have a big impact.
In 2023, but potentially could set us up well.
<unk> for the run into 2024 in the first quarter there.
You asked specifically about Eagle Ford well performance, Yes, I think we highlighted the 74 ranch wells and not Osha Candy extended laterals were seeing some great performance and great early production performance out of those and that's an area of the play.
We've got some future running room I expect that's going to be a big part of our execution portfolio in 'twenty four.
Then to 25.
And hopefully hopefully that answered all the questions that you have there.
Yes, Thanks, a lot maybe I'll just.
I think one of rain just on on Permian T. You'd asked a little bit about why we saw a little bit of a step down sequentially. There was generally speaking to a little bit of a lag in our Workover program and then on top of a couple of large producers that went down we had to get a workover rig on them and then finally, we we had.
Some midstream gas takeaway and it was a little bit delayed on one of our new pads in the quarter. All of that's been resolved now so really just a question of timing no well performance issues whatsoever.
Thanks Lee.
Yes. Thank you.
The next question comes from Josh Silverstein of UBS. Please go ahead.
Yes. Thanks. Good morning, guys you have some comments before on the some of the EG and filling opportunities. There can you also talk about just the product scope of some of the other field developments the timeline for investments are these.
A couple of hundred million project.
Our products over three or four years, just a little bit more about the scope of the opportunity there. Thanks.
Yeah, you bet, Josh happy to do so yes, just maybe stepping back first of all on the infill drilling program.
The objective here of horse in EG is to continue to base load, our $3 7 million Tpa train.
We obviously prefer to do that with equity molecules, but to the extent. There is knowledge will also drive third party molecules there to maximize the value proposition out of this really world class infrastructure.
The unique feature of course of the Alba handheld program is that we are fully aligned across the value chain from the Alba PSC all the way through EG LNG. So those are extremely valuable molecules and would ultimately help us offset and mitigate some of the decline that we're seeing from the Alba field.
And again remember we have aligned interest that we've got about 64% interest in the Alvin unit, we've got about 56% working interest in EG LNG and of course, our operator.
So the beauty of the program is this is going to be a <unk>.
Very high confidence low execution risk and in the world of offshore production, we would consider this a balanced short cycle and you can get these are this would be jackup drilling over existing facilities typically reentry dry trees and so again from an offshore perspective. These are relatively.
<unk> straightforward opportunity. The work we're doing now is of course assessing the economics really making sure that we have good solid solid target locations working with our partners to ensure there's good alignment there, but ultimately we believe up to two wells in Alabama can compete with those risks in a very strong.
The risk adjusted returns that we're generating here in the U S portfolio.
If we can stay on track with.
The <unk> decision in the near term.
Then that could have us in a position subject to rig availability to may even be able to spud late 'twenty four in that timeframe.
The way the capital will face just quite frankly Ana.
A notional couple billion dollars budget, it's not going to be material. It will be phased over time and again across our total budget.
We just don't see this to be a big needle mover for us, but very accretive opportunities.
For our E G asset.
Got it that's helpful. And then obviously, there's a lot of upside to come as the contract rolls off.
But we've also seen a lot of volatility in Tcf in international pricing is there anything you guys can do to take some of that volatility out of their is their hedging liquidity are there contracts or you can sign does anything that you can provide there.
Given we are seeing as much volatility there as we have here. Thanks.
Yes.
Yes, I think we've tried to show the notional uplift that we could obtain from the change in commercial terms that will occur January one 2024, and the reality is Josh as long as there is arbitrage between Henry hub and TGF theres going to be financial uplifted EG really it's just going to be a matter as you saw.
Set of where does that global LNG marker price ultimately land, we've shown some sensitivities 15, 20 and $40 Tcf and in all of those cases, there is a material uplift relative to what we're seeing in 2023.
The work is ongoing from a commercial standpoint.
Liquefaction agreement lifting agreements all the way through to LNG marketing more to come on that but as I think we said in our opening comments.
Good news for us as we're going out into a very competitive market today, where LNG cargoes, particularly Atlantic margin source LNG cargoes that are advances into Europe are going to be very much sought after and I would just emphasize that buyers are looking for reliable suppliers and over the life of EG LNG.
We've never missed a cargo and so I think we're in a very good position to to maybe not damp out all of the volatility that you referenced but certainly take full advantage of the market price that's available to us.
Great. Thanks, guys.
The next question comes from Scott Hanold from RBC capital markets. Please go ahead.
Thanks, and good morning.
I guess just sticking with <unk> since we're on that topic can you give us some color on how those discussions with Counterparties are going and your partners and just give us a sense if you could on.
What.
You know I guess counterparties, you're looking for in terms of duration and flexibility as well that'd be helpful.
Yes, I would just say first of all this is a competitive process Scott.
From a milestone standpoint, we're right on track in terms of the commercial milestones that we laid out and so I wanted to be absolutely clear.
There's no question that we'll be receiving global LNG pricing come.
January one right now we're in a competitive process with.
Multiple buyers.
So again drive that competitive tension and deliver what we think will be the most value.
Whoever that counterparty will ultimately be but thats, an active ongoing competitive process right now Scott.
Yes, I mean are you.
You're able to talk about what kind of duration, you're looking for in <unk>.
Obviously, you talk about maybe stabilizing the <unk> field is that part of showing that the assets have duration for those counterparties.
Yes, I'll go back to my comment around reliability and security of supply. So certainly duration is an important element that is then of course the <unk>.
Terms that we're currently discussing but until we kind of complete that competitive discussion I don't want to get too far into some of the commercial details.
Nice to say Scott that we do believe that we'll be able to provide a very solid runway.
LNG cargoes for those Counterparties and so it will be certainly we're looking at a longer term kind of contractual relationship.
Okay and then my follow up is a little on 2024, you gave a few tidbits, but.
Here Youre sticking to the maintenance program, but.
With some of the potential tailwind coming into the year that you spoke of based on your more efficient program I mean at a high level that coupled with maybe some service cost savings can you give us a sense of.
How in general you are thinking about that Capex budget relative to the one I guess 195, you're targeting this year.
Yes, well of course, it's a bit early to start forecasting into into 2024, but let me first of all I'll just share a few thoughts.
The case to be for us remains a maintenance oil production level.
That means we're going to be back targeting kind of that notional 190000.
Barrels of oil per day, so no real surprises there and in fact, even at a capital allocation level I wouldn't expect a sea change in terms of the mix amongst even our assets as we look ahead to 2024.
I do believe and I think.
I can't upon this in the comments that.
Market trends continued to.
Thank you give us an opportunity to see some downward pressure in pricing.
I think we are well positioned to take.
Canada in the second half of the year, but I think from a materiality standpoint, those deflationary impacts are really not going to take route until 2024, now that's all going to be subject to the.
The market kind of staying where it is only on the service side to continue to be a supply and demand market for them as well. So do you see an encouraging trend there, yes am I going to give you.
A quantification of that right now, it's just a bit a bit too early to go there.
Thanks.
The next question comes from Neal Dingmann of tourists Securities. Please go ahead.
No.
My question is on the D&C, specifically split the number of your peers continue to push the limits and see the benefits of go into larger wells.
Wells such as that.
The three milers and talking about the upsize that they see on returns from this versus the two milers with one I'm just wondering if you all agree.
This assessment and if so what type of opportunities you place do you have for this.
Yes, Neal it's Mike, Yes, definitely definitely agree with that assessment, it's been a focus area.
For I think it started predominantly with the Permian asset we progressed from.
A lot of single mile laterals. There. She has done an incredible amount of work over the last few years, we've actually treated which despite those into acreage over the last couple of years.
And that's allowed us to develop this inventory of 10 years plus of <unk>.
Two milers there we'd note we've now expanded data approach for having a look at potential opportunities in the Eagle Ford and the Bakken what I'd say Permian is probably still the base and that I think presents the most opportunity for us.
But as we.
We included in the deck.
We've got some opportunities that we just brought online in <unk> County.
This quarter in Eagle Ford I expect more of that Matt mentioned not earlier in the response to Arun I expect or those types of wells coming into the portfolio next year and potentially even 25, probably can look in pockets.
More of a limited opportunity set do but nevertheless that the.
The team are looking at and even Oklahoma.
We're drilling three mile Springer well at the moment is being drilled under the JV that we've got there, but if that proved successful.
If I could open up a few more parts as well for us and oily pods also.
Which is which sold which is always helpful.
I would characterize it by yes, we're definitely seeing the uplift on it's something the teams are actively progressing.
Very good that's great to hear and then.
My second question just on sort of the regional oil production I know you guys don't specifically guide on in each of the regions, but there's definitely continues to be a pretty nice notably pick up in the Bakken and I'm just wondering I guess almost simultaneously it seemed like the perm fell a little bit more than we were anticipating I'm just wondering for each of those.
Thing to read into that or is it just more timing of the D&C plant.
Well, I think and I think at Bakken Youre seeing.
<unk> strong execution there.
In the second quarter, you're seeing the benefits.
Read through into volumes, I think that with that translate into the third quarter as well.
As we mentioned, we've had three or four quarters growing volumes, there, but a bit about.
See some outperformance there a little bit of underperformance this quarter, but again as we mentioned two contributing factors. There we had a few prolific base wells with them that we have to walk over and that was simply that was transitioned from ESP and gas lift so just.
It was more of a timing thing there we do plan for a bit of that in any given quarter, but could you say a few more wells coming out of <unk>.
Normal and then it was just some tie ins that.
We're a little bit late on the gas side for the new five well pad that we brought on there.
No nothing concerning and again as we mentioned we're back on track early in Q3, usually the volumes perspective, so no concerns there.
That's great detail thanks, Mike.
The next question comes from Doug Leggate of Bank of America. Please go ahead.
Okay.
Thanks, Good morning, everyone. Thanks for having me on.
Dan I Wonder if I could just pick up on the cash tax commentary in the slide deck, It's obviously been a moving part.
Piece for you guys.
Given the Emt, but can you if I look at slide 18 can you give us an idea.
The pre cash flow delta with like a different decks.
On when you expect to transition to cash tax cash tax.
Yeah.
Yes.
Maybe not quantify specifically, but let me just tell you.
What's happening so we have in our non A&P world sufficient tax attributes not to be taxable.
Federal income tax taxable until late 2025.
When this this new rule of inflation reduction act and the <unk> that came in with it.
Imposed.
Getting a 15% alternative minimum tax that youre not paying taxes.
If you meet certain criteria and the primary criteria is if you're a three year average pretax book income.
Was a $1 billion or more.
2023, we're not we're below that.
Dollar threshold in 2024, we expect to be above that there was a big loss Euro pandemic loss year and the current three year average number that will roll off when we get to 2024. So we expect we're going to be empty taxable at a 15% rate starting in 2024.
And we expect actually to continue with that rate for about a decade.
In the background the conventional Nols.
A tax attributes will be converted to AMG credits.
So.
We'll end up sort of capping of our tax rate of 15% in the U S for that period of time at 15% will only apply to U S income, we pay a 25% rate in EG and that generates its own foreign tax credits. So it won't get double digit by the IMT.
Tax rate as well.
So hopefully that you can apply that kind of math to any price outcome youre looking at and quantify it.
I know, it's a complicated issue.
Dan Thanks for.
Run through that.
I guess my follow up Lee.
Haven't really heard a lot about Rex recently I Wonder if you could just give us your updated thoughts on what you're.
Thinking on portfolio developments.
And maybe sort of alongside.
How you see the M&A landscape for modest enough to the terrific deal you didn't you cohort.
Yes, yes.
Yes, well.
Let me start and I may ask for some support from from pad as well.
The portfolio development side, we really look at this kind of as a multi element approach when we talk about resource replenishment inventory replenishment.
On one end of the spectrum you have large acquisitions like the Ensign acquisition, which as you say it was a tremendous win.
For our shareholder.
I think the other avenue that we have are smaller bolt ons and trades and I think Mike actually mentioned that some of the trademark and the Permian is giving us access to more <unk>.
Extended laterals.
And then you have I would say our internal kind of self help which is can be some of the redevelopment activities, but also the Rex program.
S as well and so we look across all those dimensions, we talk about resource replenishment and how do we continue to build the resource base. Since we are an extractive industry, we have to stay on top of that but maybe I'll, let Pat talk a little bit about.
Our program, particularly may be focused on the Texas, Delaware program and how that's now kind of progressed from what we would have originally called Rex program now more intense developmental program.
Good morning, Doug This is Pat as we said.
Our primary project within breakfast business, Texas, Delaware oil play.
We have now fully integrated that into our Permian asset team. So it's no longer categorized as Rex.
We talked a little bit about it last quarter, we brought up.
Four well pad this year.
A downspacing test step that pad has performed exactly as we expected it to.
Oh drill another pad and 24 are coming up that will bring online in 'twenty four.
We're committed to it.
Development approach that is a four by four for the Meramec for the Woodford 10000 foot lateral length is kind of our development plan to be going forward. The good news in this recent pad as well as we still are not seeing any communication between the Meramec and Woodford. So we can definitely co develop those two zones.
Our real.
Work now is to try to drive our D&C cost down as low as possible.
A lot of experience, Oklahoma and these two formations.
So we're trying to replicate here in this project. So we will just continue to mature this project and as part of the kind of the development portfolio now moving forward.
Hey, guys. Thanks, a lot.
Currently.
Sorry, Doug I was just going to say I think it's really now focus.
This Woodford Meramec play and really looking at how do we get up the learning curve to get D&C costs down as low as practical so it really has moved more into a.
Development project has to compete for capital allocation and that's exactly what we want to see is an output from the Rex program is moving that stuff into development mode. I did want to come back to your question just around M&A.
M&A, though real quickly I think you mentioned of course, the very successful Ensign acquisition, if anything Doug I would say that actually raised the bar.
For us from a from an M&A perspective.
We're not going to compromise obviously on our criteria along those lines I mean, we would be making sure that something is absolutely accretive from a financial metric standpoint, it would have to be accretive from a return of capital standpoint, it would have to be accretive to our overall sustainability, meaning inventory kind of re.
<unk> life accretive there has to be industrial logic there.
It needs to be in one of the basins, where we have high execution confidence and then finally, we wouldn't want to do anything that would damage the financial flexibility in the balance sheet that we've worked so hard to establish that's a that's a very tough filter and I will tell you today as we look into the market.
Don't see anything today that really hits all of that criteria and that's what we saw in ensign. It really did check all the boxes and Thats why I think that's been such a successful addition to our portfolio.
The clarification question Lee.
The Permian oil play and included in your inventory what would you say the inventory life is not in the Permian I'll leave it there. Thank you.
We'd probably say today based on your Pat kind of doing a nominal floor by floor spacing, recognizing obviously that there's some variability across the play but it's generally a contiguous 55000 acre position. So we're thinking several hundred locations right now and we'll get more specific on that as we get up.
That learning curve on D&C and to really integrated in with the rest of our enterprise level inventory.
Thanks, guys.
I appreciate it thank you Doug.
The next question comes from Matt Portillo of PTH. Please go ahead.
Good morning, all just a follow up around the shift in the tail count for the year.
Notice that the Oklahoma assets, a slight down shift in your expected build into the JV I was curious if that was operationally driven or if just given the low commodity prices. Some of those wells are sliding into 2024 and more broadly speaking how do you think about the return profile in Oslo.
Relative to the rest of the portfolio.
Yeah. This is Pat Matt just a little bit of.
The JV in Oklahoma that is a very targeted program and we're getting close to finishing that up.
<unk> really been focused.
Focus around lease retention, they're using somebody else's capital trying to maintain our leads program with some other strategic strategic advantages, including.
Crew working there.
Yeah.
Anything else to that.
No I don't think Theres any sumit.
I think we guided 15 to 20 wells there earlier modestly.
Would it be at the Gwen.
Range I don't think Theres anything.
Three because we went to that.
Yes.
Perfect and then maybe just a follow up on the JV is across your asset base.
Do you have a couple at this point that are for lease retention purposes.
Given the strengthening crude market and what could be better environment for gas and Ngls as we head into 2025.
How is the company's aptitude or kind of appetite at the moment for incremental JV versus retaining as inventory locations in developing in those on your own going forward.
Yeah. This is Pat again I think.
Our approach on Jv's to date is to keep them very small targeted to achieve certain strategic objectives.
Not doing large multiyear operated programs, we're just trying to satisfy lease commitments or protect operator ship things like that so we will continue to view it through that lens.
See an opportunity to do that.
We will go ahead and do very small ones.
Most of the inventory that we consume in these JV is not our top tier inventory.
You bet.
We will go ahead and drill that but if theres lesser quality inventory that doesn't compete for capital in the correct.
Next few years, and we need to execute on it to retain a lease that will bring in a JV partner to help us do that.
Thank you.
The next question comes from Paul Cheng of Scotiabank. Please go ahead.
Thank you good morning Hector.
I apologize that I joined late so yes. My question has already been addressed please let me know when you look at the transcript.
Neil just curious that.
Some of your competitor is talking about that we think can be development opportunity.
Legal front.
When you guys do a.
More detailed analysis on that.
It assumes that currently your.
Inventory backing off that you mentioned 10 to 12 years.
<unk> debt.
Including those that are helping is that opportunity for you and what kind of oil and gas pipe.
In order for things that to be economic.
Last question.
Yeah, Yeah, Let me, let me take a first pass at that then I'll, maybe let Mike fill in some details.
First of all in terms of inventory, we do not put.
Re fracs into our inventory so when we talk about inventory life. These are primary.
Off development opportunities new drill wells. If you will we've had a lot of experience in the Eagle Ford with re frac into about and redevelopment and continues to be.
An area that we pursue but again because we have so many primary recovery opportunities. There, we usually do them when theyre synergy with nearby new development work.
But maybe I'll, let Mike just throwing up his two cents as well yes.
On the head there our approach with <unk> is we're pulling together a plan of development. We're looking at our primary end. So we'll have a look at the section and will determine the attitude to determine then is there a potential re frac.
Canada or refract candidates and the section.
Quite frankly, those opportunities how to compete for capital on a heads up basis with the with all the other opportunities. So rest assured that we're doing re fracs.
They are profitable and they are competing with with infill opportunities I mean to give you a kind of ICF for scale in any given year I think we're probably doing last we're probably in the 10 to 15 Fracs. This year and that's kind of how we think about it it's not a targeted program. We will go on to a bunch.
<unk> exactly to Louis' point, I think we've got enough primary.
And so opportunities because we just don't want to do that.
I think you answered most of your questions there.
Go to compete on a heads up basis with.
So the other capital that we're deploying the other maybe item I would point out Paul as well as thank you just reflecting back on the ensign conversation that we're having.
And that and that acquisition, we place no value on re frac and redevelopment activities and base value really on PDP and a forward 600, plus new primary recovery kind of opportunities that exist here. So as you recall from the acquisition there were some.
700 existing wells, many of which most of which were completed back in time right and so you've got a lot of early generation completion technology out and we haven't we haven't had a chance yet to quantify that because the primary opportunities for ensign or so.
Tractive Theyre, a little bit further down our priority list, but we absolutely expect in the balance of the time to continue not only in the legacy area of inferred, but also in the Ensign area of the Eagle Ford So look at re Frac and redevelopment opportunities going forward, but again, it's just a question of prioritizing them within the capital out.
<unk>.
Thank you. The second question is wanted to go back into the <unk>.
Commercial negotiation on the.
Post 2023.
Is it necessary for you that 200% of the woman under long term contract.
From a portfolio management standpoint for you to.
We set up a.
Fairly sizeable him on the spot market. So that you can take the opportunity of the trading.
Maybe maybe arbitrage opportunities and also that I know you already have that much exposure.
Yeah on the international gas market.
It makes sense for you to buy.
This supply.
Sure.
Maybe that.
One may argue with I guess upon Enzo engineering on your U S. Natural gas exposure to also linked to international market by signing some.
Finally agreement with the U S Gulf Coast LNG operator.
Pierre.
Hi, Paul This is Pat I'll take them, maybe I'll start with your second question first.
The us gas linkage to.
LNG I mean, we're always exploring ways to maximize our realizations.
While we are heavily exposed in EG to oncology.
LNG markets. So there's nothing imminent in the U S. You have to have a significant amount of gas volume.
To do that in the U S can.
We just haven't focused on that and don't see us doing that.
In terms of EG.
We will commit to a certain level of volumes through a long term contract.
We will have some some terms in there that I want to get into too much detail that we will have.
How we handle extra volumes, but I expect that we will have capacity above that sell into the spot market.
Chris.
That's a lot of those details are still to come and it depends on the specific negotiations.
Okay.
Hey, Tim.
Wanted to clarify that.
And the company.
Intention.
We'll beat the ideal mix for the UK contract do you have a number yet say 70%.
On contract and 30% spot or something like that something smaller than the number that you can say.
No I don't have any specifics to share with you, but I would think the bulk of the contract will be fixed.
Okay. Okay. Thank you.
Thank you Paul.
Seeing that there are no further questions at this time I would like to turn the call back over to Lee Tillman for closing remarks.
Thank you for your interest in marathon oil and I'd like to close by again thanking all our dedicated employees and contractors for their commitment to safely and responsibly deliver the energy of the mall now more than ever.
I cannot be prouder of what they achieved each and every day. Thank you and that concludes our call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.